The Senate voted Friday to get rid of subsidies that “too big to fail” banks receive from what is, essentially, an unofficial insurance policy from the government. The unanimous vote, 99-0, is unfortunately nonbinding. It was an addendum to the Democrats’ 2014 budget proposal, which is not expected to live long.
Although ceremonial, the vote shows the potential for bipartisan agreement on the problem of “too big to fail." It has become clear that investor confidence in big banks over smaller ones, who are small enough to fail, has provided big banks with an $83 billion insurance policy, according to a Bloomberg study, for which they pay nothing.
Last month, Senator Elizabeth Warren grilled Federal Reserve Chairman Ben Bernanke on the issue.
“Ordinary folks pay for homeowner’s insurance. . . and pay for car insurance,” Warren told Bernanke. “These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government will step in and bail them out. I’m just saying—if they’re getting it why shouldn’t they pay for it?”
“I think we should get rid of it,” Bernanke finally said.
The measure, put forth by Senators Sherrod Brown and David Vitter, has gotten broad bi-partisan support.
“This is a really impressive sign that we mean business on ending too big to fail,” Vitter said. “Megabanks are still receiving special handouts that create an uneven playing field—making it harder for our community banks and credit unions to compete.”
Although many argue that the amendment doesn’t go far enough—it doesn’t break up the banks and instead introduces methods of reform through taxation, size caps and leverage limits—Warren says that it is an “important step forward. . . I'm glad that Republicans and Democrats can agree—'too big to fail' needs to end, and these big-bank subsidies make no sense.”
In a Senate testimony earlier this month, Attorney General Eric Holder agreed with Warren saying that he is “concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”
Big banks, naturally, have criticized the proposal Brown and Vitter put forth, insisting that the benefits of “too big to fail” are exaggerated.
“Forget what someone said and look at what the market does,” Jamie Dimon, CEO of JPMorgan Chase, said in a Fox interview last month. “That subsidy does not exist in the market place…
“[Washington representatives] haven’t finished all the work yet,” he said about studies like the Bloomberg report, which Dimon insists uses incomplete numbers. “At the end of all that, if people believe in breaking up the big banks, one day, we’ll all be sitting here trying to figure out why the Chinese banks dominate American finance.”
But Warren has given up on financial executives’ abilities to act in the public interest. From hiding losses to lying about its role in the 2008 bailout, JPMorgan’s word, like that of many other banks’, is difficult to swallow. “'This bank is anti-fragile,' a seemingly more honest Dimon told investors last month. 'We actually benefit from downturns.'"
“That's the problem with Wall Street,” Warren says. “They believe that they’re the only people smart enough to understand the rules. Too many of the Wall Street bankers want to write their own rules. . . and then if it all comes crashing down, they'll land in the taxpayers’ lap, looking for a bailout.”
The next step in the heated discussion on “too big to fail” is to see whether representatives will stick their convictions in front of their campaign contributors, putting their money where their mouths are and not the other way around.